US Airline Industry Is Growing
Monday, March 28, 2022 4:50 PM



The airline industry act as a necessity to human beings, in fact it will be difficult to imagine a life without airplanes in today’s world. According to the U.S. Department of Transportation, the airline industry can be segmented into four categories, they are, International, National, Regional, and Cargo. In this report I have taken the international and national segments of the airline industry.

Airline Industry recovers from the financial crisis

Just like any other industry in the United States Airline Industry was also hit by the economic downturn in 2009. During that period the passenger air traffic declined by 2 percent. However, the airline industry is resilience in the United States, and it was proved in the economic downturns that have hit the US economy in the past. According to a report, published by Boeing Co. (NYSE: BA) the US airline industry has returned to its long-term growth rate of 5 percent per year. Boeing added, “Passenger traffic is projected to rise 6 percent for the year, with similar annual growth rates for 2011 through 2014.”

The US Bureau of Transportation Statistics data showed that the US airlines passenger carriers carried 58.6 million domestic and international passengers in December 2010, representing an increase of 2.9 percent from December 2009. For the full year 2010, the number of domestic and international passengers on US airlines increased by 2.4 percent to 720.4 million compared to last year.

However, as the Airline industry recovers from the crisis, it now faces another threat to its profitability, the rising crude oil prices. The airline companies’ profitability depends largely on the oil prices, so much so, that 34 percent of the cost in major airlines carriers is linked with the oil prices. In case of budget airlines such as JetBlue and AirTran this cost can reach up to 50 percent of the overall cost. In order to protect themselves from the effect of rising oil prices, the airlines companies tend to hedge significant portions of its fuel expenses at various prices per barrel below the market price. As of today, Jet Fuel is trading at $1,059 per metric ton, compared to price of $850 per metric ton in June 2008.

Industry’s Financial Overview

The Major Airlines industry has a total market capitalization on $305.2 billion and has a return on equity (ROE) of 70 percent. The dividend yield of the industry is 0.52, while its P/B value ratio is negative 1.57. The P/E ratio of the industry is 41.60 and its net profit margin is 0.80 percent. The two biggest companies by market capitalization within the industry are Delta Air Lines Inc. (NYSE: DAL) and United Continental Holdings (NYSE: UAL).

Delta Air Lines Inc. (NYSE: DAL) has a total market capitalization of $8.5 billion. For FY 2010, DAL reported net sales of $31.75 billion, up 13 percent from $28.06 billion in FY 2009. Net income for the period was $593 million, or $0.70 per diluted share, compared to net loss of $1.23 billion, or $1.50 per diluted share in FY 2009.

On the valuation front, the stock is trading at the P/E multiple of 14.50 much lower against the industry average of 41.60. The Company reported net profit margin of 0.24 percent against the industry average of 0.80 percent. DAL gave a return of 103.85 percent on equity against the industry average of 71 percent. DAL last traded at $10.17 on the New York Stock Exchange on Monday.

On the other hand, United Continental Holdings (NYSE: UAL) has a total market capitalization of $7.4 billion. For FY 2010, UAL reported net sales of $23.23 billion, up 42 percent from $16.33 billion in FY 2009. Net income for the period was $253 million, or $1.08 per diluted share, compared to net loss of $651 million, or $4.32 per diluted share in FY 2009.

On the valuation front, the stock is trading at the P/E multiple of 20.86, lower against the industry average of 41.60. The Company reported net profit margin of negative 3.85 percent against the industry average of 0.80 percent. UAL has a P/B ratio of 4.28 against the industry average of negative 1.57 percent. UAL last traded at $23.97 on the New York Stock Exchange on Monday.

Conclusion

Airline and economic growth is dependent on each other, as improved economy leads to the growth of the airline industry, which in turn helps in the economic growth. Hence, after analyzing the airline industry, I expect a growth of 8 percent in the short term and 6 percent in the long term for the industry, despite the rise in oil prices.

 

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